Part I: The Employment Picture
We have accepted for decades that the decline of U.S. manufacturing is inevitable, with lengthy analyses since the 1970s dedicated to finding a root cause for the inexorable deterioration of this vital sector of our economy.
Manufacturing employment peaked in 19791. Past economic downturns have precipitated significant drops in manufacturing employment, notably the recession of 2001, which cost us 17% of our manufacturing positions. Ominously, employment in manufacturing did not completely rebound when the rest of the economy recovered in 2004, despite strong economic growth.2
Job losses are only part of the story, however. U.S. manufacturing productivity has historically increased even during recessionary periods, and advances in productivity have been responsible for significant reductions in manufacturing employment. From 1973-1995, productivity increased at an average annual rate of 2.7%, accelerating to 4.1% from 1995-2007. Overall, manufacturing productivity increased by one-third from 2000-2007. During the 2001 recession, productivity measures still showed gains in the face of massive job losses.6
Has this trend continued through our current recession? The Bureau of Labor Statistics reported that second quarter 2009 productivity gains in manufacturing were the largest since the third quarter of 2003, with manufacturing productivity increasing 5.3%.7 This should have been heartening news, but it turns out that the much-vaunted gains were due to cost-cutting, as employee work hours fell faster than output, which also declined in the second quarter.
Cutting costs to prop up the bottom line is not a corporate strategy unique to manufacturing, and the spate of positive second quarter earnings reports are due largely to aggressive cost-cutting by businesses desperate to turn a profit for their stakeholders. In the case of manufacturing, though, cost-cutting strategies are growing rot from within as they steer employees to other sectors and divert talent from research and development. This process may be difficult or impossible to reverse in the years ahead.
The United States is the world’s largest manufacturer. China will eventually usurp this position, but there is an advantage to providing U.S. consumers with a supply of less-expensive imports that we no longer need to produce here. Instead, our emphasis must be on fostering research and development in wealth-building industries. Unfortunately, we are failing in that regard, and have been failing for years.
The 2001 recession dealt a serious blow. A February 2004 Congressional Budget Office report showed that more than half of the manufacturing employment losses since 2000 included core, wealth-producing sectors such as computer and electronic products, transportation equipment, machinery, and fabricated metals,8 all industries that depend on a skilled labor force. The current recession has dealt further, serious damage to the labor force in industries that must thrive if we are to secure our economic future in the developing world economy.
Consider the machine tool industry, which is vital to manufacturing in general, and absolutely critical to high-technology sectors such as defense, aviation, and aerospace. This sector continues to hemorrhage jobs. Further, the production indexes for fabricated metal products, machinery, and electrical equipment declined in July 20099, even while output for other manufacturing sectors increased. Reemployment rates for manufacturing in general have experienced significant declines since 2000, and earnings losses for workers who do find new employment are rising,10 so there is a growing disincentive for prospective employees to seek positions in the sector that provides bedrock support for much of our industry.
Offshoring the R&D function only exacerbates the problem. While productivity gains from offshoring prop up the bottom line, our economy is deprived of the benefits of domestic technology advancements and the associated intellectual property, and denies itself the advantage of developing an evolving pool of highly skilled labor.
Our country cannot subsist on productivity gains that result from slashing jobs so corporate boards can brandish positive earnings. We will not know for years whether the current recession followed previous patterns, and possibly dealt a death-blow to core U.S. manufacturing sectors. Our government has chosen to deal with the fallout from this recession by emphasizing politically popular “green” industries, and constituent-popular short-term government infrastructure projects. Having witnessed our government heedlessly throwing hundreds of billions of unwanted dollars at the financial sector, we can only assume that political expediency, and not national necessity, will guide the future of U.S. manufacturing.
Next Week Part II: A Tale of Two Governments